Berkeley’s Soda Tax Surprise

Mandating one-cent per ounce,  the sugary drink tax in Berkeley, California was approved by voters during November 2014. Called Measure D, the proposal was supposed to diminish obesity and encourage healthy eating.

It did not quite work out that way.

Where are we going? To who winds up paying a tax.

The Berkeley Tax

As the first city level sugary drink tax in the U.S., the Berkeley penny per ounce approach targeted the producer side of the market. Advocates of the tax expected the cost to be passed from the sell-side to the consumer. Then, as any logical person would predict, consumers would buy less because of the price increase.

However, as you can see below, the price barely budged. Rather close to San Francisco’s prices where no sugary drink tax had been levied, Coke’s mean price per 20-ounce bottle increased by 8.2 cents rather than 20 cents (a penny an ounce).

From: “The Incidence of Taxes on Sugar-Sweetened Beverages: The Case of Berkeley California”

As a result, consumers had little incentive to change their buying behavior.

What Happened?

The Berkeley response was a surprise. On the national level, from Fiji to Finland to France, sugary drink taxes have affected consumption. Furthermore, when a tax had to be paid by the supply side, as in Mexico, some sellers even increased that price more than the tax.

So, some economists are hypothesizing that Berkeley was too small a geographical unit to have success. After all, extending across only only 10.5 square miles, Berkeley is rather small. It is possible that sellers decided it would be too easy to shop outside the city. Consequently they absorbed more than half of the tax.

Out Bottom Line: Incidence of a Tax

When a tax is levied on the supply side, lawmakers can never be sure who will pay it. If the distributor or the retailer passes along to the consumer a price hike higher than a tax, we say the incidence has been overshifted. On the other hand, if consumers wind up paying less, we say the tax has been undershifted. In econ texts, undershifting can be explained by demand elasticity. If buyers have a disproportionate response to price, sellers will have an incentive to bear at least some of the burden or the incidence of a tax.

And that returns us to Berkley’s sugary drink tax. Whether a municipality wants to control obesity or just to raise revenue with taxes on soda and other drinks to which sugar has been added, it needs to know about incidence and elasticity.